SEC proposes performance fees and looser repurchase rules for interval funds

The Securities and Exchange Commission voted on Sept. 30 to propose rule amendments that would let registered investment advisers charge performance fees inside regulated funds, loosen the repurchase rules governing interval funds, and codify multiple share classes for closed-end funds, a package the agency framed as expanding retail access to private-market strategies, according to trade coverage from AltsWire and The DI Wire. The terms that will determine how much of that access is real sit in the proposing releases, not the reporting: the conditions on a deferred sales load deduction for interval funds, and the three conditions a performance fee must meet.

The commission also opened a separate request for comment on whether individuals should be able to qualify as accredited investors by passing a FINRA-developed exam or by holding specified professional credentials, among them the certified public accountant license and the chartered financial analyst and certified financial planner designations. Chairman Paul S. Atkins framed the effort around demand. “Investor demand for private market investment opportunities is growing, and one of my priorities for the commission is to explore ways to facilitate the ability of individual investors to participate in private markets, while at the same time protecting those investors from bad actors and fraud,” he said. He described the work as “focused on expanding opportunities for investors’ post-tax, pre-retirement dollars” and said it complements efforts under President Trump’s executive order on democratizing access to alternative assets for 401(k) investors.

Multiple share classes are the third element of the package and the least described in the coverage of it, which notes that the commission would codify them for closed-end funds without setting out the terms; that item reads as the distribution-side piece, the part about how private-market strategies reach individual buyers rather than how they are managed once they arrive.

For sponsors of interval funds, the more consequential document is the second proposing release, which would amend Rule 23c-3 so repurchases can be scheduled at times that better match a portfolio’s liquidity profile. It would permit four changes: extended deferral of the first repurchase offer, more frequent discretionary repurchases, monthly periodic intervals, and the deduction of deferred sales loads from repurchase proceeds, subject to conditions.

Together, the four changes turn the interval fund’s periodic repurchase window from a fixed appointment into something a sponsor can tune, with monthly periodic intervals shortening the wait for the next scheduled offer, more frequent discretionary repurchases giving a sponsor a lever to pull between windows, and extended deferral of the first offer pushing back the day a young fund faces a queue at all. Letting a deferred sales load come out of repurchase proceeds changes what a redeeming investor actually receives rather than when the payment arrives. The next redemption queue will test sponsor conduct as much as portfolio liquidity as semi-liquid books season, and the proposal changes the instrument of that test: how often the queue opens, how fast a sponsor can act on it, and how much of a redemption survives the load.

The load deduction is the least specified of the four and the one that alters a holder’s arithmetic rather than the calendar, and the coverage says only that it would be conditioned; what those conditions turn out to be will determine how much of a repurchase request reaches the investor who filed it.

The first release addresses the fee side. Advisers to regulated funds—registered management investment companies and business development companies, in the SEC’s definition—could receive performance fees calculated on capital gains or capital appreciation if three conditions are met, but those conditions appear in the release rather than in the reports of it. Registration and reporting forms would also be amended to require disclosure of performance-based compensation, and the agency’s stated expectation is a supply response: advisers “may be more likely to launch and allocate private market strategies to regulated funds,” according to the fact sheet that accompanied the proposals.

Eligibility moves in the same proposal. The qualified client definition would be revised to include investors who meet Regulation D’s accredited investor definition, with the separate net worth and assets-under-management tests removed, and putting that revision in a package built around performance-fee compensation suggests the two are meant to travel together, widening the set of investors and the set of fee arrangements they can be offered.

The accredited-investor request for comment is the broader question, because it proposes an exam or a credential in place of the thresholds that define who may buy private offerings. The release names the CPA license and the CFA and CFP designations as qualifying credentials; the coverage does not describe how an exam would be built, scored or administered. An exam sorts investors by preparation and a credential sorts them by training, neither quite the same screen as a number on a balance sheet, and the commission has put the substitution out for comment rather than adopting it.

A proposing release is not a rule, and the Sept. 30 vote opens all of it to comment, with the interval fund changes sitting in a release of their own rather than in the headline fee package. The comment process is where those conditions will keep their shape or get revised.